An Attorney in the State of New York is required to open an Attorney Trust Account when in the possession of a client’s funds (including escrow monies). The establishment of this account is to ensure that a lawyer’s funds and the funds of clients are maintained separately pursuant to NY R.1.15(a), NY R.1.15(b)(1) and Disciplinary Rule 9-102(a) and (b). An Attorney is prohibited from commingling their funds with those of their client. Further, the Attorney is prohibited from using the funds of their client or in other words an Attorney must not misappropriate the funds of a client whether knowingly or negligently.

Judiciary Law – JUD § 497 provides guidance on decision making in whether to open an interest-bearing account or IOLA account. In the vast majority of instances a IOLA account would be appropriate but it is up to the judgement of the Attorney.

The account shall be opened in a New York located branch of a banking institute that has agreed to reporting bounced Attorney Trust Account checks to the NY client protection fund.

The practice documents that should be maintained (for a period of 7 years) pursuant to NY Rule 1.15(d) and Disciplinary Rule 9-102 are as follows:

1. Retainer and Fee agreements;
2. Disbursement statements and communications for all funds disbursed to a client or on their behalf including billing statements; and
3. Records of payments to other lawyers and non-employees for services rendered.

The banking documents that should be maintained pursuant to NY Rule 1.15(d) and Disciplinary Rule9-102 (for a period of 7 years) are as follows:

1. Bank Statements;
2. Copies of cancelled imaged checks (prenumbered); and
3. Copies of deposit slips.

Additional source documents that should be maintained pursuant to NY Rule 1.15(d) and Disciplinary Rule9-102 (for a period of 7 years) are as follows:

1. Checkbooks; and
2. Check stubs (also called check tails).

Accounting documents that should be maintained pursuant to NY Rule 1.15(d) and Disciplinary Rule9-102 (for a period of 7 years) are as follows:

1. Receipts Journal;
2. Disbursements Journal; and
3. Individual Client Ledgers.

Simply maintaining these documents (Receipts and Disbursements Journals and Individual Ledger cards) would be foolish but arguable compliant. However, a NY Attorney must take into consideration their obligation under R.1.15(a), which states: “Prohibition Against Commingling and Misappropriation of Client Funds or Property. A lawyer in possession of any funds or other property belonging to another person, where such possession is incident to his or her practice of law, is a fiduciary, and must not misappropriate such funds or property or commingle such funds or property with his or her own”. Disciplinary Rule 9-102. (22 NYCRR 1200.46) states the same.While maintaining a receipts journal, disbursements journal and individual client ledger cards would meet the minimum requirement, it fails to give you the ability to identify potential issues more easily, such as a shortage in the Attorney Trust Account.

The information that is required as part of each required accounting document is as follows:

1. Attorney Trust Receipts Journal – documentation of the date of deposit, source of deposit and description (reason) of each deposited item.

Pursuant to NY R.1.15(d)(1)(i) “the records of all deposits in and withdrawals from the accounts specified in Rule 1.15(b) and of any other bank account that concerns or affects the lawyer’s practice of law; these records shall specifically identify the date, source and description of each item deposited, as well as the date, payee and purpose of each withdrawal or disbursement”.

• Attorney Trust Disbursements Journal – documentation of the date of deposit, source of deposit and description (reason) of each deposited item.

Pursuant to NY R.1.15(d)(1)(i) “the records of all deposits in and withdrawals from the accounts specified in Rule 1.15(b) and of any other bank account that concerns or affects the lawyer’s practice of law; these records shall specifically identify the date, source and description of each item deposited, as well as the date, payee and purpose of each withdrawal or disbursement”.

• Attorney Client Ledger Cards (sheets) – Essentially an individual document per client for which the Attorney is holding funds to that documents all transactional history of the funds from receiving to disbursement that would include the date of deposit/disbursement, the name of the client(s) for whom the Attorney was holding funds for, amount of funds, source of deposits, description of funds being received, payee of distributed funds and description of disbursed funds (reason).

Pursuant to NY R.1.15(d)(1)(ii) “a record for special accounts, showing the source of all funds deposited in such accounts, the names of all persons for whom the funds are or were held, the amount of such funds, the description and amounts, and the names of all persons to whom such funds were disbursed”.

Further, NY R.1.15(d)(1)(viii)states that “all checkbooks and check stubs, bank statements, prenumbered canceled checks and duplicate deposit slips.”. The inclusion of prenumbered checks is important and checks should be issued in number order to aid in the reconciliation process, which while not described in the rule as required (reconciliation of the account) would go a long way in meeting the obligation of R.1.15(a), in ensuring funds remain intact.

Rather than stop there, it would go along way to take into consideration some additional recordkeeping practices to bolster your compliance efforts. The most important would be to reconcile your account via a three-way reconciliation (Bank Reconciliation, Book Reconciliation and Listing of Client Balances), this will be helpful in understanding where the account stands at any given point of time (it is a good business practice to do these monthly). However, there are additional things you could be doing to further enhance your control over your NY IOLA Account.

Before we get to the three-way reconciliation of your NY IOLA Attorney Trust Account, lets work our way up by creating a strong base of underlying documents beginning with the source documents.

1. Designation of bank statements, deposit slips and checks: they must bear the Attorney’s name or practice and display one of the three following designations “Attorney Special Account,” “Attorney Trust Account,” or “Attorney Escrow Account”. There should be consistency throughout the three documents.
2. Use of prenumbered checks: Attorney Trust Account checks should be prenumbered and issued to assist in the reconciliation process (the bank reconciliation in particular). Additionally, you should consider writing the matter no. or client’s name in the memo section of each check issued to correlate back and make a review easier for yourself or for someone else coming in.
3. Cancelled imaged checks: you should be receiving these from your bank with your account statements monthly while not specifically required, it would benefit you as a reviewer to have the front and back of the check image to be able to review.
4. Deposit slips: you are required to maintain copies of deposit slips, you should consider writing the client’s name next to the amounts being deposited to easily identify who the deposits were made for, especially when multiple client deposits are made on one slip.
5. Checkbook register: while not specifically required, this document would be helpful to maintain as an overall register of all activity within the Attorney Trust Account (deposits and disbursements), it would include: the date of deposit/disbursement, the name of the client(s) for whom the Attorney was holding funds for, amount of funds, source of deposits, description of funds being received, payee of distributed funds and description of disbursed funds (reason) with a running balance of the account (which becomes helpful in the reconciliation process).
6. Enhanced client ledger cards – while the rule requires the date of deposit/disbursement, the name of the client(s) for whom the Attorney was holding funds for, amount of funds, source of deposits, description of funds being received, payee of distributed funds and description of disbursed funds (reason), you should include a running balance to see what funds remain on deposit. This same format would be used for any nominal amount of funds that are within the NY IOLA account for Attorney funds being maintained for bank charges/fees.
7. Three-way reconciliations:
   1. Bank reconciliation: This is performed by taking the ending balance of a bank statement and accounting for any outstanding items (checks or deposits in transit).

It would follow a similar format as follows:

ATA Bank Ending xxxx
Bank Statement Ending Date:	7/31/2021
Ending Bank Balance:					$5,125.00
Less: Outstanding Checks:
Date	Check No.	Payee	Amount
1/1/2021	123	John Doe	$100.00
1/1/2021	124	Jane Doe	$25.00
Total Outstanding Checks				($125.00)
Add: Deposits in Transit
Date	Source	Amount
				$0.00
Adjusted Bank Balance:					$5,000.00

• Book Reconciliation: which would be found by going to the checkbook register and taking the book balance as of 7/31/2021.
  • Listing of client ledger balances: Which is obtained by going through your client ledger cards and listing all clients that have a balance as of 7/31/2021 and would look similar as below:

Listing of Client Balances as of 7/31/2021
Date of Last Activity	Client	Balance
1/1/1990	A. Smith	$ 1,000.00
10/21/2020	N. Jones	$    500.00
11/24/2020	B. Franks	$ 1,500.00
7/15/2021	G. Washington	$ 2,000.00
Balance:		$5,000.00

The balance of all three reconciliations should match, if so, you are on the right track.

• Aging of client balances: now that you have performed a three-way reconciliation, you should have an aging report of balances within the Attorney Trust Account. You should be reviewing the listing of client balances for balances that are inactive for a period (6 months or older is a good rule of thumb). Remember, pursuant to NY Rule 1.15(d) and Disciplinary Rule 9-102 you are required to promptly disburse funds. If there is a legitimate reason to hold funds such as a dispute or something like an environmental clean up escrow then make note.
• Review of old outstanding checks: if you have checks older than 6 months that remain outstanding you should be reaching out to see why the payee has not deposited the check and reissue if necessary.
• Review of cancelled imaged checks – flip through your cancelled check images to see if anything sticks out. In the case of a check cashed for an incorrect amount (potentially in bank error) you will find that your reconciliations do not match, this is a good place to look. Additionally, this is a way to catch employee fraud if employees have access to trust account checks, handle the recordkeeping or reconcile the account, this can provide a level of comfort by seeing that checks are written out to proper parties.
• Deposit in transit review: if you do not prepare your own records and/or have someone else prepare reconciliations for your review, if you notice a deposit in transit that has remained on your reconciliation for month after month, or even for more than 3 days, you will want to question this as it could be used to make a reconciliation work and could easily lead to disbursing on uncollected funds causing a misappropriation in the Attorney Trust Account.
• Investigation of unidentified funds – if there is an overage in the account (cannot attribute an amount to a particular client) do not assume this is found money or must be yours. You run the risk of misappropriating funds to yourself without a claim or support for taking the funds.
• Review of debit balance ledgers – if you find a ledger has a negative balance you should be investigating the cause of such negative balance and work on replacing the funds. For, if a client ledger is negative, that amount is being covered by other client’s funds and thus invading those other clients funds.  

A final point, if you can, separate duties, the person who is writing checks in a multi member firm should not also be reconciling the account as it leads to no oversight. Similarly, an attorney should be reviewing the reconciliations performed by an inhouse or outsourced person to ensure that funds remain safeguarded.

Thank you for reading, I hope you find this helpful.

Feel free to reach out to us for a conversation. There is always a path forward. We take great pride in our work and have worked on both sides of the Ethics process. We provide consulting services, reconstruction of accounts, and monthly recordkeeping services.

Will Colangelo CFE

WMC Accounting Services LLC

Will@wmcaccountingservicesllc.com

732-221-6404